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OMB Guidance on Indirect Costs

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Jul 6, 2016

The National Council of Nonprofits presented a webinar on the uniform guidance and what it means for nonprofits receiving federal funds directly or funds passed through state and local government agencies. View the recorded webinar from September 9, 2015 on YouTube.

Background on the Uniform Guidance

On December 19, 2014, the White House Office of Management and Budget published the interim final guidance on the Office of Management and Budget Uniform Guidance. View the final guidance.

The National Council of Nonprofits issued a press release on Dec. 19 responding to the release of the guidance:

“The National Council of Nonprofits and its nationwide network of state associations of nonprofits will be actively monitoring implementation of the Uniform Guidance, equipping nonprofits with the tools they need to properly allocate and manage their costs and stand up for their rights to be reimbursed, and collaborating with government officials to fix broken systems to increase efficiency and save taxpayer dollars. At the end of the day, this is a win-win-win for nonprofits, governments, and most importantly, people in communities across America. Let’s get to work, together.”

Here are some excerpts from that press release:

The Office of Management and Budget undertook the process of establishing the uniform guidance to ease administrative burdens, increase efficiency and effectiveness of federal awards and strengthen oversight of federal funds to reduce the risks of fraud, waste, and abuse.” This guidance merges eight related OMB circulars and comprehensively overhauls the federal grant-making process to ensure consistency across governments.

Highlights of the new OMB Grants Guidance

Indirect Costs: The Uniform Guidance explicitly requires pass-through entities (typically states and local governments receiving federal funding) and all federal agencies to reimburse a nonprofit’s indirect costs by applying the nonprofit’s federally negotiated indirect cost rate, if one already exists. If a negotiated rate does not yet exist, then nonprofits are empowered either to negotiate a rate based on federal guidelines, or to elect the default rate of 10 percent of their modified total direct costs (MTDC).

Direct Costs: The guidance makes clear that, in certain circumstances, program administration (e.g., secretarial staff dedicated to a specific program) can be reported as direct, rather than as indirect, costs.

Audit Rules: The new guidance also raises the threshold for a single audit (A-133) requirement from $500,000 to $750,000, thus reducing costs for smaller contracts and grants.

Streamlining Federal Guidance: The new guidance consolidates and streamlines eight OMB circulars, including OMB Circulars 110 and 122 that relate to charitable nonprofits. As a result, applications and reporting will be standardized and streamlined to provide more consistency across various federal agencies.

Effective Date: December 19, 2014.

Significance of the New Guidance

These rules are a major victory for the people nonprofits serve. The rules signify a recognition that governments entering written agreements with nonprofits have a responsibility to pay their fair share of the costs nonprofits incur in fulfilling their responsibilities. This update reflects the reality that for these agreements to succeed, nonprofits must pay for the internal controls and organizational infrastructure required to efficiently and effectively deliver those services.

If properly implemented, these rules would prevent governments from imposing artificially low limits on reimbursement of nonprofits’ indirect costs in delivering public services. Those arbitrary caps have essentially forced charitable nonprofits to subsidize government. The rules also provide the opportunity for government to work collaboratively with the nonprofit sector to ensure consistent application of the Uniform Guidance, fully and fairly implement the cost principles and other grants reforms, reduce costly burdens and streamline the grants and contracting process, and save taxpayer dollars.

However, nonprofits must take action to own their own costs, learn their rights under the new rules, and protect those rights through advocacy on their own behalf and for the broader nonprofit community.

Funders can help by alerting grantees to the Uniform Guidance and helping with mission-based investments in stronger cost allocation systems by grantees, professional development, and advocacy for the sector to ensure government compliance.